Fitch Rates Chandler, AZ Street & Highway User Revenue Bonds 'AA-'

Business Wire, Sept 24, 2004

AUSTIN -- Fitch Ratings assigns its 'AA-' rating to the $11.1 million street and highway user revenue refunding bonds, series 2004 of Chandler, Arizona. The bonds are scheduled to price Sept. 28, via negotiation led by Peacock, Hislop, Staley & Given, Inc. Additionally, Fitch affirms its 'AA-' rating to the city's $34.1 million (net of refunded bonds) street and highway user bonds outstanding. The Rating Outlook is Stable.

Repayment will be solely from a first lien on revenues derived by the city from the highway user taxes and all other taxes, fees, and charges collected by the state and returned to the city for street and highway purposes as prescribed by law. Proceeds will be used to refund certain outstanding bonds for interest savings.

The 'AA-' rating reflects solid debt service coverage, ample liquidity, and manageable future borrowing from this source. Also considered in the rating is the population- and point of origin consumption-driven distribution formula for highway user tax revenues. Chandler continues to experience rapid population growth as compared to other Arizona cities, which has resulted in increasing point of origin sales, both contributing to rising highway user tax revenue collections for the city.

Combined with conservative fiscal policies, Chandler has utilized these revenues to leverage additional street improvements and provide ongoing funding of capital improvements and maintenance while maintaining prudent debt service coverage levels and cash balances. As the city approaches residential build-out over the next five years, the proportion of its population as compared to that of other cities and towns will likely stabilize and may even decline over time. However, the strength of fiscal management and the city's financial flexibility, as well as the anticipated diminished need for growth-related capital improvements, all lead to credit stability.

Highway user tax revenues are collected by the state and deposited into the state highway user fund until distributed. There is a constitutional requirement that the majority of the items comprising the highway user fund may only be used for street and transportation-related purposes, including paying debt service on bonds issued by the state and political subdivisions. Highway user tax revenues consist of motor vehicle fuel taxes, motor vehicle registration fees, motor vehicle licenses taxes, motor carrier fees, motor vehicle operator's license fees, and other miscellaneous fees and revenues. Arizona cities and towns receive 27.5% of highway user tax distributions. One-half is distributed to cities and towns on the basis of population in proportion to all cities and towns in the state. The remaining one-half is distributed, first, on the basis of county origin of sales of motor vehicle fuels within the state, and second, to cities and counties on the basis of population in proportion to all cities and towns in the county.

Chandler's population increased 95% from 1990-2000 and nearly 30% from its 2000 population of 176,581 to an estimated 227,000 in 2004. As such, although other cities within Maricopa County have demonstrated population growth as well, Chandler's highway user revenue receipts have realized steady gains over the past decade, particularly in years following a census. The average annual rate of growth from fiscal 1993 to fiscal 2003 has been 8%, with an additional 6.8% increase estimated for fiscal 2004 due to continued growth in gasoline sales. Utilizing actual fiscal 2003 revenues of $11.4 million results in debt service coverage of 2.4 times (x) for maximum annual debt service (MADS) on all highway user bonds, including the current refunding. In addition, calendar year-to-date collections of pledged revenues are running well ahead of the prior year period, and are significantly higher than the modest 1.2% increase over estimated 2004 collections budgeted for fiscal 2005.

Liquidity position is also strong and reserve levels remain substantial, with the fiscal 2003 highway user revenue fund balance representing nearly 50% of expenditures and transfers out. This reserve level far exceeds both the city's 10% minimum fund balance and its 15% goal. Legal provisions provide adequate bondholder protections. They include an additional bonds test of 1.5x of MADS for both outstanding and bonds to be issued.